Choice Equities Capital Management, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A net return of -2.5% was recorded by the fund for the third quarter of 2021, bringing year-to-date gains to +33.8%. This compares to the Russell 2000’s -4.4% loss in the quarter and +12.4% year-to-date return. The S&P 500 produced gains of +0.6% for the quarter and +15.9% for the year. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Choice Equities Capital Management, in its Q3 2021 investor letter, mentioned Farmer Bros. Co. (NASDAQ: FARM) and discussed its stance on the firm. Farmer Bros. Co. is a Northlake, Texas-based coffee food service company with a $120.6 million market capitalization. FARM delivered a 42.83% return since the beginning of the year, while its 12-month returns are up by 72.80%. The stock closed at $6.67 per share on December 13, 2021.
Here is what Choice Equities Capital Management, has to say about Farmer Bros. Co. in its Q3 2021 investor letter:
“FARM – As noted above, shares of coffee roaster and distributor Farmer Brothers traded off nearly all quarter, at one point declining nearly more than 40% over the last few months. Clearly, this wasn’t quite the start I envisioned when initiating this investment, as the level of originally anticipated improvement in company financials did not arrive on time this summer because many of their customers’ doors remained shut due to the Covid-19 resurgence from the delta variant.
Despite the decline, I continue to focus on progress to date and the outlook. When I do, I find comfort in this fact: a few years ago, when the economy was open and people had coffee together, this was a $30+ stock – albeit then, the company had a lesser management team and its roasting operations relied upon a vastly inferior and inefficient, old plant. Admittedly, perhaps that statement is a bit backward looking. So, looking forward, the more relevant question becomes: can this company again achieve the level of cash flows that support such a valuation?
Progress to date suggests such performance remains achievable, if not likely. The company recently concluded the “fix” phase of management’s “fix, optimize, grow” strategy. Progress is showing up in the financials, even though sales remain quite depressed from pre-Covid levels. As a case in point, in the prior quarter even with volumes still down some 25 percent from pre-Covid levels, the company has already returned to prior pre-Covid gross margins. The 85-year-old Houston plant, costly and inefficient, has been exited and sold. And the multiyear migration to the new Northlake Dallas plant, a facility which cost over $100M and is regarded as among the top roasting facilities in the US, has been successfully completed. Equally promisingly, the company is now seeing green shoots on volumes, with management reporting many days in the current quarter have been the best since the onset of the pandemic thus far.
Other initiatives such as expanding the product line by adding NuZee and High Brew and reinvigorating the company’s own product innovations are also starting to bear fruit. The Coffee Brewing Equipment arm now called Revive, looks to be another smart way the company can deepen relationships with customers by providing expedient service for coffee brewing equipment. At this point, the company simply needs customer doors to open and stay open. Then the “optimize and grow” phases of their plan can unfold as originally anticipated. “
Based on our calculations, Farmer Bros. Co. (NASDAQ: FARM) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FARM was in 14 hedge fund portfolios at the end of the third quarter of 2021, compared to 12 funds in the previous quarter. Farmer Bros. Co. (NASDAQ: FARM) delivered a -22.80% return in the past 3 months.
During the first quarter of this year, we also shared Choice Equities’ views on FARM in another article. You can find more than 100 investor letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q3 page.
Disclosure: None. This article is originally published at Insider Monkey.
